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Non-compete clauses in business transactions

Categories:

Business law, Franchise Law, Civil and commercial litigation

Whether the business transaction is a sale of shares held in a corporation, a sale of business assets or even a Shareholders’ Agreement, just to name a few, we often come across a Non-Compete Clause.

What is a Non-Compete Clause?

A non-compete clause is often found in corporate and commercial transactions. It basically sets competition limits, often in view of restricting an individual or a group from competing against one another regarding a similar activity within a specified territory and within a specified timeframe.

Therefore, when a shareholder sells his entire shareholdings to a purchaser, that purchaser in the transaction may have an interest in restricting the vendor from competing with the business which involves the sold shares. This practice is mainly where the value of the transaction lies.

The same concept applies in a Shareholders’ Agreement. You would like managing co-shareholders to have a collective incentive to succeed in the same business in which the parties have engaged, and if they choose to part ways, a non-compete clause will restrict the withdrawing shareholder from competing with the business, which would otherwise be detrimental.

There Are Legal Limits

Legal limits have been established by our courts throughout time and the Supreme Court of Canada has set boundaries in virtue of which certain restrictions by non-compete clauses are declared abusive in time, in length, and territorially. For example, more the business is involved in a specialized field, the greater the territory and duration which the non-compete clause may cover.

The non-compete clause is even more so meaningful when there is Intellectual Property involved within a given transaction. If the vendor intends to continue business within a similar field, a non-compete clause which is not drafted properly may cause legal and costly headaches. For example, an Industrial Designer who sells his business had better be careful with non-compete clauses, because they are usually coupled with intellectual property waivers, which restrict the vendor from using similar methods, practices or know-how following the transaction. That could potentially limit the ability to continue doing business in the same field.

The same example could apply for writers as well as music and theatre entertainers. Therefore, you might want to reconsider having to include a non-compete clause if you are selling a business or undertaking a project under such contractual conditions.

There are transactions, however, where the competing business is not an issue. It is then prudent to specify this in writing within the contract detailing the transaction, so that there is no misunderstanding between the parties.

Essentially, a lawyer with corporate and commercial experience is often your best asset to overcome the challenges that a Non-Compete Clause pay pose in your transaction.

Emmanuel Kouzelis, Attorney-at-Law
Alepin Gauthier Avocats Inc

Non-compete clauses in business transactions
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